THE SHIELD OF ACHILLES

by Bobbitt, Philip

  A steel mill, the exemplary industry of the industrial age, lends itself to control by governments. Its massive output is easily measured and regulated at every point by government. By contrast, the typical means of production in the new epoch is a man at a computer work station, designing microchips comparable in complexity to the entire steel facility, to be manufactured from software programs comprising a coded sequence of electronic pulses that can elude every export control and run a production line anywhere in the world.22

  Regulation by law—the characteristic method of the nation-state—is both losing its effectiveness because of this technology and becoming more costly because the technology of computers has conferred greater value on intellectual capital, which flees from regulation wherever possible.

  Indeed some of the core concepts that enabled the nation-state to attempt to manipulate its economy through regulation have become vacuous under the pressure of the mobility made possible by computing technology. The notion of the trade balance that has long been held to be crucial to the nation-state depends upon our being able to value the goods and services exchanged in international trade and to assign these values to a particular state. Where the most valuable good is information, which is highly mobile and cannot be measured in these terms, however, it is fruitless to measure trade balances precisely because they are limited to the measurable. One example is the printed book: for a publisher in one nation-state, “foreign earnings” from such a book in another state may account for a large share of total revenue, even though no actual books are exported. This is because it is more profitable for the publisher to sell derivative copyright licenses than to ship books abroad. As Peter Drucker points out, “the most profitable computer ‘export sales' may actually show up in trade statistics as an ‘import.’ This is the fee some of the world's leading banks, multinationals and Japanese trading companies get for processing in their home office data arriving electronically from their branches and customers around the world.”23

  Moreover, computing technologies have made possible the complex logistics of transnational value-adding production.

  The dress a customer purchases at a smart store in San Francisco may have originated with cloth woven in Korea, finished in Taiwan, and cut and sewed in India according to an American design. Of course a brief stop in Milan, to pick up a “Made in Italy” label, and leave off a substantial licensing fee is de rigueur before the final journey to New York.24

  In such circumstances, what sense does it really make to consider this an Italian export? We accept, conventionally, that it matters if the company exporting from Milan is U.S.-owned; the company earnings will be repatriated and can be measured. But suppose it simply can't be determined what country's investors own the exporting company, and to what degree the country that finally exports a product to the United States is the source of value? This casts doubt on the very notion that the world can be subdivided into national economies. And if this is so, then monitoring one of the key functions of the nation-state is erased to nothingness.

  Walter Wriston asks:

  How does a national government measure capital formation, when much new capital is intellectual? How does it measure the productivity of knowledge workers whose product cannot be counted on our fingers? If it cannot do that, how can it track productivity growth? How does it track or control the money supply when the financial markets create new financial instruments faster than the regulators can keep track of them? And if it cannot do any of these things with the relative precision of simpler times, what becomes of the great mission of modern governments: controlling and manipulating the national economy?25

  Monetary and fiscal policy are the two great levers available to the State to manage its national economy. By manipulating the value of its currency, a state can raise or lower interest rates, stimulate or suppress growth, increase exports or imports. In a world of floating exchange rates, however, states do not set the value of their currencies with respect to an external standard—such as the gold standard, or a basket of values related to interstate economic comparisons like the European Monetary Standard— but rather are judged by the market as if currency were any other commodity, like soybeans or petroleum.* In such an environment, the computer has made possible the instantaneous judgment by the market as to the value of any particular currency because it allows hundreds of thousands of investors to voice their demand decisions through computer-assisted transactions vastly in excess of the demand for money required by purchases of goods and services. As Wriston, the former head of one of the world's largest banks, noted, “[u]nlike all prior arrangements, the new system was not built by politicians, economists, central bankers or finance ministers. No high level international conference produced a master plan. The new system was built by technology.”26 As of this writing, the amount of dollars trading per day exceeds the total GDP of the American economy annually; only a tiny fraction of this is available to central banks trying to manipulate this trading.

  Wriston asked, “What becomes of the great mission of modern governments?” The reply must be: the mission changes. The market-state ceases to base its legitimacy on improving the welfare of its people, and begins instead to attempt to enable individuals to maximize the value of their talents by providing them with the most opportunity to do so. “Be everything you can be” replaces “A chicken in every pot.”27

  The market-state has shifted its mission to respond to the new circumstances in which the nation-state found itself. Market-states composing a society of such states reflect the consequences of the strategic changes that won the Long War; with respect to rapid computation, two kinds of challenges arising from this history are paramount: (a) the possibility of a trade war among the developed northern-tier states and/or a trade collapse between North and South, and (b) the transnational problems of protecting the environment. Both of these challenges to the society of market-states are attributable to the revolution in information technology—North-South discrepancies in wealth resulting from a dramatic change in the terms of trade have been further accentuated by it—and yet both problems can benefit from this technology.

  CONFLICTS ARISING FROM INTERNATIONAL TRADE

  TRADE WARS

  The society of market-states will be dominated by three important actors, much as the Cold War was dominated by two. Europe will be the world's largest market and the largest trader; Japan will be the world's largest creditor, as it is now, with a GDP that approaches that of the United States; the United States will remain the world's most powerful single economic state, the possessor of the world's reserve currency,* and the market with the largest GDP.

  Since the end of World War II, economic relations among these three actors have been largely guided by the Long War objectives they shared and the security alliances that served those objectives. Indeed there was relatively little direct collaboration between Japan and Europe, as both saw their futures as linked directly to Washington. German redevelopment occurred, perhaps could only have occurred, within the nuclear and conventional strategic guarantee of NATO. This relationship tempered economic competition in both directions: the Americans were anxious to develop a strong ally as a bulwark against communism; the Germans were eager not to alienate the Americans and be abandoned in the center of Europe, astride the division between East and West. Germany realized that its long-term goal of reunification could only take place under American sponsorship; America understood that a neutral West Germany would not only demoralize the remaining noncommunist European states, but would cease to be the driving economic engine of European recovery within what was then the European Economic Community (EEC). The EEC itself was strongly endorsed by the United States as offering the best prospect for European growth and stability.

  With respect to Japan, the intertwining of economic development and security guarantees was even tighter. Japan faced at least three potentially lethal adversaries in the western Pacific and was largely unarmed; she therefore depended upon the United S
tates to underwrite her survival as an independent state. At the same time, the United States was an avid mentor, encouraging economic development. Here too Washington believed that its own struggle against communism would be best served by a dynamic, capitalist economy in an allied state. For its part, Japan attempted to pacify U.S. alarm over growing American trade deficits, in order not to upset existing security arrangements. As C. Fred Bergsten observes:

  The United States and its allies… frequently made economic concessions to avoid jeopardizing their global security structures. Cold War politics in fact sheltered the economic recoveries of Europe and Japan, and America's support for them. The United States seldom employed its security leverage directly in pursuit of its economic goals; indeed, security and economic issues remained largely compartmentalized in all of the industrial democracies.28

  Bergsten concludes that the end of the Cold War will “sharply heighten the prospect of a trade war”29 among these three northern-tier communities. For each of the world's principal market-state actors, the overriding security concerns that muted its economic conflicts have receded, and there are substantial incentives to play a rougher game. In Europe, efforts to deepen the European Union (bringing about greater political centralization within the E.U.) and widen it (expanding E.U. membership to Central and Eastern European states) mean that imports to the European market are likely to decline. Preferential access to markets within the E.U. will act to deliberalize global trade. Even with Great Britain within the E.U., the historically mercantile trading policies of France and the consistent German demand for a strong euro—with all this entails for the other E.U. members' monetary policies in a single currency environment—will drive the demand for strong external barriers against the United States and Japan. A strong euro makes German exports less marketable and makes foreign imports more threatening; if the other E.U. states are required to adopt deflationary monetary policies, then it is difficult to see how they could maintain liberal trading policies with either Japan or the United States.

  For their part, the United States and Japan are locked in a kind of codependency. The Japanese have a large investment in American firms* and hold a large amount of American external debt.30 Indeed Japan can be said to have financed the U.S. budget deficit for over a decade. Without this ready buyer of American debt—Japan is now the world's largest creditor state and holds between one-quarter and one-half of all U.S. debt to foreigners—interest rates in the United States would have increased, choking off growth. The alternative, a rapid and precipitous tax increase, would have had the same effect, drawing liquidity out of the American economy at a vertiginous rate. There was, in reality, no other short-term alternative. At the same time, Japan has been dependent on the vast American market to supplement consumer demand at home. Only this fertile opportunity has permitted Japan to maintain full employment despite a sluggish domestic economy that has failed to generate new jobs. Without exports to the United States, Japan would have unemployment rates similar to those of Western Europe—9 percent to 11 percent at this writing—and higher in the politically sensitive smokestack industries that are facing ruthless competition from states such as South Korea.31 Like two persons trapped in a bad marriage, the United States and Japan have grown increasingly hostile to one another precisely because each blames the other's unwillingness to reform for its own troubles. There are powerful political voices in both countries that find popular support in bashing the other. Any significant recession in either state would result in calls for an aggressive protectionism—but against whom?

  Strategic studies in history, as well as contemporary game theory, suggest that a multipolar system is an unstable configuration.32 Two parties will inevitably coalesce, leaving the third in a highly threatened position. The incentive that drives war is usually the desire to prevent a steadily worsening position. In such circumstances it hardly matters to the society of states which coalition forms—there are plausible scenarios for all three possibilities. Europeans and Americans have strong cultural bonds; the United States and Japan have, as we have observed, strong economic links that are acutely sensitive to severance; Japan and Europe have similar protectionist attitudes, and similar models of close cooperation between banks and industries with government planning and support.

  Nor would a trade war necessarily take on the overt, violent manifestations of previous wars. If that were so, then perhaps the underlying strategic strength of the United States would assert itself toward harmony (though it is just as possible that Germany and Japan would react by developing nuclear weapons). Rather it is more likely that trade conflicts in the twenty-first century will be fought with covert means for which governments could deny responsibility. So-called logic bombs, which are planted in computer software, could disrupt and even cripple the economic behavior of any of the advanced states. The “choke points” so beloved of strategists from Mahan onwards, the closing of which could interdict sea-borne supplies, may now take on a less geostrategic and more cyberstrategic aspect. In a tripolar world of disguised, privatized attacks, against whom does one retaliate? And if retaliation becomes uncertain, of what real significance is it that a state has the power to retaliate, this power having lost any deterrent effect?

  The nation-state is peculiarly vulnerable to such attacks because they appear to come from the private sector and not directly from a rival state. With its sharp division between state activities and private ventures, nation-states have difficulty—as we have seen in the case of covert state-sponsored terrorism—dealing with threats that do not obviously come from other states. A society of market-states could better cope with such attempts at extortion. The emergence of the intense economic competition that characterizes market-states, however, might also combine with another strategic innovation of the Long War, the development of weapons of mass destruction, in a particularly threatening mode.

  Consider, for example, the possibility of using biological (and possibly chemical) weapons not against the military targets of the nation-state, but against the economic targets of the market-state. Suppose an adversary raw materials producer—say China—attempted to gain market share in corn exports by dramatically weakening U.S. corn production. There are corn-seed blights, such as fusarium graminearum, that could be clandestinely sprayed over the U.S. Midwest from commercial airliners flying the polar route from Beijing to Chicago or St. Louis.33 If this hardy spore were disseminated in winter, the blight would be present in the soil at the time for spring planting. The resulting corn-seed blight would crush the U.S. crop. Hogs and cattle would become too expensive for many farmers to feed. The United States would be forced to import corn for the first time in its history. Food prices would skyrocket with immense profits to those states that could still produce. If, as Shintaro Ishihara predicts, “the twenty-first century will be a century of economic warfare,” the means of prosecuting such warfare will arise from the innovations that won the Long War.

  Information technologies are the product of the synergy evident in two of the Long War's strategic innovations, international communications and rapid computation. These technologies enable private companies to elude and even punish nationalist attempts by governments at controlling the market. As a result, market-states are compelled to avoid measures that are anticompetitive if these states are to maintain the basis for their legitimacy, because only the most efficient responses to the demands of the international market will maximize the opportunities available to consumers and producers. Patently “protectionist” moves to manipulate that market—as Japan, Europe, and the United States have all attempted—are, in fact, counterproductive because the information technology available to the private sector can easily counterbalance any national efforts to govern the market. Two examples will suffice.

  In order to stimulate exports, Japan has manipulated the yen, depressing its value. The domestic Japanese economy, however, has not responded to this stimulus, even at interest rates that are at historic lows. With a huge dollar
surplus, the Japanese have been forced to overinvest in United States assets even though Japanese financial experts, and the Central Bank, knew these assets were overvalued and would have to be marked down. The United States attempted a similar effort to boost exports in the late 1970s by depressing the value of the dollar. American exports rose sharply, but here too the domestic economy failed to pick up. Indeed it fell into a recession, producing high unemployment figures and high inflation. In both cases international markets in the yen and the dollar absorbed the manipulative efforts of governments, without producing a domestic stimulus.

  Only economic activity that actually enhances wealth—as judged by its contribution to the valid information devoured by the market—produces growth. Neither the Japanese nor the U.S. model for economic management is necessarily better (despite current appearances to the contrary), as we will see in the next chapter, because each must be measured not only in terms of economic performance but also with respect to the culturally idiosyncratic needs of very different societies. Neither a mercantilist, export-driven policy with an emphasis on capital formation and protection nor a free-trade, consumer-oriented, debt-financed policy is a priori superior. Either policy can succeed*and has—so long as it does not defy the source of wealth within the society of market-states, valid information, by attempting to manipulate that information through regulatory, fiscal, and monetary policies. Corruption and cronyism, on the one hand, and concern for the disruptive effects of free trade on workers or protected sectors like farming, on the other, can motivate states to perpetrate such distortions.